Seems to me this is wrong...the deficit will go up if overall spending falls.

If we hit the cliff and nothing is done about it politically, the deficit will fall and the private sector will not be able to meet its saving desire unless exports increase to offset, which is unlikely.

This means that either the private sector borrows to sustain spending, i.e. dissaves, or the economy contracts.

When the economy contracts, then tax revenue falls and automatic stabilizers increase, increasing govt expenditure. But a recession may come before the increased spending kicks in.

So we would likely be looking at a recession in the first quarter of 2013 if nothing is done.

It's helpful to think in terms of Paul Krugman's cross - a diagram later elaborated upon by Parenteau, Fullwiler, etc.

The cliff causes a shift of the G minus T schedule downward and to the left. It will intersect the I minus S schedule at a point corresponding to a lower GDP and a lower budget deficit - all other things being equal.

Sometimes, the only way to follow an argument is by visualizing it in a graphic. Krugman's cross is a powerful and clear description of the workings of an economy. It should be used more often, both inside classrooms and on web debates.

If things happen as DeLong says and the deficit is ALLOWED to fall as a result of the government not spending enough, the economy will contract, which in turn will require a bigger deficit resulting from decreased revenues,, which if not fulfilled will lead to a bigger contraction..rinse and repeat for a downward spiral.

This will no more "cut the deficit" than austerity would, both lead to spiraling contractions with higher unemployment.

The deficit cannot be "cut" or "fall"...it is an ex-post "signal" that the system needs more liquidity. Failure to add said liquidity will just create a larger "signal", expressed as increased unemployment and a decrease in economic output among other things, all bad.

Sure there is…in theory…it's the same intersection the austerians in Europe are shooting for, and never reaching. Why is this theory not working in the eurozone?

Your mistake (and DeLong's) is assuming that non-government net savings will adjust down to balance with the "lower" deficit…you are ignoring the distribution of those net savings. You are making the same mistake as the austerians in thinking this equilibrium is reachable.

It matters who spends, and the folks that must spend to keep the economy going and at the same time dis-save don't have the funds, in savings or otherwise, the funds you claim will be dis-saved won't be forthcoming from anywhere else so…

…It will result in higher unemployment, lower incomes, leading to lower tax revenues, leading to a higher deficit, and there's not a damn thing the private economy can do about it, and the deficit will cry to be higher.

Where those schedules intersect does not exist in the real world, or if they do, we don't want to try to live there…it represents total disaster.

This is not a stable equilibrium and I'm not sure it is even possible to reach it. But it does exist in theory.

Paul -- I agree completely. That lower deficit is not a place we want to be economically. Even as bad as it is in Greece, they still haven't reached any of their deficit targets. The UK and Australia are just now getting the reports of their economies showing the failure of their austerity programs to reduce their deficits. Yet, their governments refuse to accept reality and are sticking with the neo-liberal mythologies to the detriment of their citizens.

I'm not saying that the lower deficit as a result of the cliff is a good thing. It's very bad - it will mean a lower GDP and a higher unemployment rate.

I'm just pointing out the likely direct result of the cliff: lower GDP, lower net private savings and a lower (not higher!) budget deficit in absolute numbers - in case there is no change in the ex ante savings desires of the private sector.

Of course, if families react to the lower GDP by wanting - ex ante - to save even more than they do now this will depress GDP further and ultimately lead to an increased deficit at an even lower level of GDP.

But this is a second phase, that will arise or not depending on an unknown - the reacting behavior of consumers, families and firms.

Hey, this is just the sectoral balances approach inherited from PK economics, Godley/Lavoie version. It's important to be consistent in our analyses by using the approppriate SFC model. De Long was right about the fiscal cliff implying a lower deficit as a direct consequence. But - while recognizing this - it should be made clear that we don't care for lower deficits: we want full employment GDP no matter how large or how small the deficit will be at that level.

Ultimately, the deficit should be treated as means to an end, not as a policy objective.

Jose, I know you aren't saying it's a good thing. That's not what I'm implying.

What I am saying is simply this…the lower deficit that theory points to as a consequence of the sectoral balances is mathematically unattainable in a closed system.

Your assumption that the deficit can possibly go down is incorrect. The only mathematical possibility of reducing the deficit is by increasing growth, through increased spending, or increasing taxes drastically on excess saving by the filthy rich while cutting taxes on wage-earners.

This "fiscal cliff" nonsense is no different than the austerity strategy that has been in operation in the Eurozone…have deficits declined? Will they ever?

Let's imagine a scenario where the fiscal cliff is followed, for some reason, by a fall in the exchange rate of the dollar. Net exports would increase.

I hope you agree that under such circumstances the fiscal cliff might be followed (note that I'm not saying "causing") both by a decreasing deficit and a non decreasing GDP - because the lower demand from the public sector would be compensated by increased net demand from the foreign sector. Unlikely? Yes. Impossible? No.

My point is simply that we cannot know in advance what the behavior of the private and foreign sectors will be, folowing a putative cliff.

The SFC approach tells you that, theoretically, there could be a scenario where both GDP and the deficit would come down in the first moment on the condition that the 2 other sectors don't change their ex ante spending schedules much. If they change said plans, different results may well arise including the one you pointed out.

We should take all possible scenarios in consideration so that we won't be accused of sloppy reasoning by the neoclassical school. Yes, the fiscal cliff may set the U.S. economy in a new recessionary spiral with GDP decreasing and deficits ultimately increasing. But this is not the only possibility, according to the SFC approach - especially in the very near term.

Our credibility will only be enhanced if we state in anticipation the full spectrum of results that are possible in our SFC model, from an accounting perspective. And I agree with you that if an overleveraged private sector reacts to the fiscal cliff by trying to save even more at each level of income, then the final result may indeed be a recession with an even higher budget deficit than the present one.

I agree completely with everything you've written in your last comment. Those ideas are not in dispute.

What I've been objecting to is that the wrong either-or choice is being made by DeLong as the likely outcome. We have two possible outcomes (three if we include no change), and one is not within the realm of likely outcomes.

That's it, that's my argument.

I am confident the "fiscal cliff" cuts/tax increases will contract the economy, and the deficit will go up, not down, based on all previous evidence.

To believe otherwise is to believe in magic, which is the case with the Eurozone elite and now it seems America's best-and-brightest.

That's true, paul, but the increasing deficit due to falling tax revenue and increasing automatic stabilization could be modified by limiting the latter. In fact, this is the push on the US right now. They seem to like the EZ approach.

The EZ approach has failed to lower deficits. DeLong says it will lower deficits. We have a problem here.

I'm taking the position that it borders on "can't be done".

It's like chasing a mirage.

If the PTB succeeded somehow in eliminating the spending necessary to fulfill deficits, which is basically an appeal for liquidity, the economy as we know it would cease to exist. That, is simple arithmetic.

This makes no sense, it's national suicide.

This discussion makes it seem like suicide is an option. Will wonders never cease? Let's sit around and discuss seriously the many ways in which we can kill ourselves.

BTW, I've never made the argument that the government can't pass legislation that prohibits fulfilling the deficit…which would mean refusing to pay bills as they come due.

Ii should add that it's safe to say that all the neoliberal "concern" is just theater that masks the hidden agenda to pillage the village.

The dirty secret is that "capitalism" doesn't work. It can only be kept in place through subterfuge and, when necessary, force.

As not saying here that markets don't work. But it's a jump in logic to say that markets are equatable with "capitalism." "Capitalism" means dominance of financial and non-financial ownership over labor, together with the capture of political power to achieve and maintain this arrangement of privilege.

Credit, markets, and money are all human inventions that have been subverted to privilege. That need not be the case.

They are sociopaths ("crazy"). They are smart enough to know that this scheme cannot work but they seem to be blindsided to it. Unless they are really intent on going back to a Dickensian world in which the lower classes are debt-serfs forced to the bidding of their masters. Do they actually think that there will not be a revolt. Or then and again, perhaps this is the true purpose of the security state.

It's difficult to analyze the mindset of TPTB because there are many currents of thought - with slight yet not insignificant differences among them - within the mainstream. There is also a distinction to be made between the U.S - still the global hegemon with unsurpassed firepower in military matters - and a European Union where the elites are still trying to perfect the institutional mechanisms to guarantee their rule over the "lower orders" at a continental level.

Where both sides of the Atlantic appear to be converging is on the idea of using the crisis to impose austerity, thus keeping unemployment permanently high and frightening the population at large with job insecurity.

This seems to be the new model of developed capitalism that the western elites are proposing for the 21st century, designed to replace the previous more or less social democratic version. It's being promoted under the pretext that globalization is making life hard for everyone, that we cannot keep living "beyond our means" like in the good old days when emerging markets weren't integrated in the global economy, etc.

As Dean Baker perceptively points out, this threat of competition is never applied to the well-to-do classes. For these people the very powerful state sector will always be there to protect them (contrary to the myths propagated by free market apologists the era of minimum interference by the state is long gone, never to return; many seem to forget that as late as the 1930s the U.S. didn't even have a standing army - pre-National Security State capitalism was a very different animal indeed!).

Paradoxically, the financial crisis is being used to reinforce neoliberalism. The banks caused the crisis but the public sector is paying the bill. The austerity idea - the false analogy between a household and a government - now seems to be slowly capturing the political discourse.

Perhaps this proves the truth of a sentence once written by the historian A.J.P. Taylor: that without a strong, well-organized socialistic party present in the political scenario all democracy is but a sham.

This must be our task, then: organize a mass (underline "mass") anti-austerity party to counterbalance the total hegemony of neoliberalism, including that part of the neoliberal camp that disguises itself under the brand names of "liberal" (U.S) or "social democratic" (Europe).

It should be feasible. People naturally like full employment. They just need to be given the choice to vote for a political force that uncompromisingly defends the principles of full employment and of an economy always working at, instead of below, capacity.